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Kansas: Appeals Court Upholds Denial of Lender Liability Claims

Posted By USFN, Tuesday, March 04, 2014
Updated: Monday, October 12, 2015

March 4, 2014

 

by Robert E. Lastelic
South & Associates, P.C. – USFN Member (Kansas, Missouri)

In Tang v. Bank of Blue Valley, 2014 WL 702404 (Kan. Ct. App. Feb. 21, 2014), Kim Tang and Tong Bui not only sued the bank seeking to be relieved of their liability to the bank for a loan originally made to their contractor, but also for substantial money damages allegedly sustained. The bank filed a counterclaim requesting recovery on the loan represented by a note secured by a mortgage or for any deficiency that might result. The Kansas Court of Appeals affirmed the trial court’s decision that granted summary judgment to the bank on all issues.

The bank originally had made a loan to a contractor to acquire the land and to build a house for Tang and Bui. The record disclosed that Tang and Bui were aware that the contractor had used all of the loan proceeds, yet the house was not complete. With the loan coming due and the contractor out of money, Tang and Bui signed on to the loan at a reduced interest rate and the maturity date was extended. After several extensions, Tang and Bui stopped paying interest on the loan and filed suit against the contractor and the bank, asserting several legal theories. The bank counterclaimed seeking a money judgment on the note and foreclosure of the mortgage. The lower court granted judgment in favor of the bank; Tang and Bui appealed.

Tang and Bui contended that the district court erred in holding that: (1) their agreement to become obligors on the loan was supported by legally sufficient consideration; (2) the bank owed them no fiduciary duty; and (3) the bank did not breach any implied duty of good faith and fair dealing.

The appellate court held that the reduction in the interest rate was legally sufficient consideration. However, the court declined to consider the sufficiency of the bank’s additional claimed consideration of the exercise of forbearance in not proceeding to exercise its right to enforce the note at maturity and proceed with suit, if necessary, to recover on the note and to foreclose the mortgage securing the loan, thus allowing Tang and Bui the chance to be able to complete construction of the house and to acquire the property, while benefiting from the funds they personally had put into the transaction.

As to the bank’s alleged breach of fiduciary duty, the appellate court, citing prior Kansas case law, held that the bank did not occupy a fiduciary position in making a construction loan and had no legal duty to police the progress or quality of the builder’s work. The court also stated that there was nothing in the record to demonstrate special circumstances to convert a typical lender-borrower relationship into a fiduciary one. Furthermore, the appellate court held that the bank did not violate its implied duty of good faith and fair dealing governing the loan agreement. In summary, the court stated that the bank did nothing to interfere with Tang’s and Bui’s rights under the loan agreement. Lastly, the court of appeals ruled that no disputed issue of material fact nor legal theories were presented which would allow Tang and Bui to go forward with their claims against the bank or preclude the bank from enforcing its rights under the loan agreement. As a result, the judgment of the lower court in favor of the bank was affirmed.

In conclusion, this case confirms three legal principles: (1) Legal sufficiency of consideration does not rest on the comparative economic value of the consideration and of what is promised in return; (2) Absent special circumstances, the lender-borrower relationship creates a creditor-debtor relationship, not a fiduciary relationship; and (3) The implied duty of good faith and fair dealing governing a loan agreement requires that the parties refrain from intentionally doing anything to prevent the other party from carrying out the agreement or which would have the effect of destroying or injuring the right of the other party to receive the fruits of the contract.

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